Russian ESPO Pipeline Threatens Europe Oil Supplies

Russia’s Transneft has opened its second and final branch of the $25 billion, 4,700km East Siberia-Pacific Ocean (ESPO) pipeline to double its capacity to 30 million tons for total exports of 36 million tons in 2013.

There are three things of significance here:

The capacity-doubling pipeline could render the ESPO blend crude an official new blend on the world market

It makes Russia’s Far East a major infrastructure player, posing it to become a strategic transit point for oil to Japan, China, the US, South Korea, the Philippines, Singapore and Taiwan

The first phase of ESPO saw the completion in 2009 of a pipeline from Irkutsk to Skovorodino in Russia. However, the link from Skovorodino to Kozmino oil terminal on the Pacific Coast was by rail. The second phase included a pipeline section direct to the Pacific Coast.

It’s about access to Asia-Pacific markets, which the ESPO offers by linking Siberian oil fields to the port of Kozmino, in Nakhodka Bay. But it’s not only about access, it’s about product, and the ESPO stands to become a new competitive blend on the world market for the first time.

The ESPO blend (known as VSTO in Russian) was created specifically for the pipeline that bears its name. It is the top blend in Russia, favored for its lighter qualities and lower quantities of salt chloride. The pipeline opens up an avenue for the favored ESPO crude to get to market at a higher price and makes it more competitive than crude from the Urals, which for now serves as the main export blend for Russia. According to the Russians, the ESPO crude blend is even better than competing blends from Dubai—at least in terms of sulfur content.

What is Russia hoping for in the end? It’s already assured of the Asia market with ESPO; but it is seeking to tap into the American market and compete with West Texas Intermediate (WTI).

Will it achieve this aim? So far so good, but there are some challenges. First, we’re not sure if Russia can keep the ESPO running at capacity. Its oil fields in East Siberia are not fully developed, and while there is enough oil pumping right now to keep the first phase of the pipeline fed, the extension might require a diversion of oil from fields in West Siberia.

Russia will certainly have to increase production if it wishes to meet its goal of exporting 36 million tons of ESPO to Asia this year. Transneft, the pipeline’s operator, predicts the pipeline’s capacity to increase to 80 million tons in the future. But it’s not capacity that’s worrying--it’s production.

Regardless, Europe should be concerned. Right now, it receives much of Russia’s Urals crude, upon which it is heavily dependent. The completed ESPO provides Russia with more leverage by way of another key outlet for its oil to Asia-Pacific countries. If it is able to pump enough through the ESPO, it can threaten Europe by turning off the taps without too much damage to its own balance sheets.